Strategic Frameworks and Strategies of the Firm's Entry into New Market - Research Paper Example

Introduction Entering into a new market is one of the most challenging tasks that a firm undertake in order to achieve its strategic objectives. There are various reasons as to why a firm enters into a new market and how it can achieve its objectives however; one important question that needs to be understood is the relative forces that are at work in the new market. Understanding various factors such as political and social environment of the country as well as overall business environment therefore provides clear and concise information regarding the potential risks and benefits that can arisen after the firm decides to make an entry into the new market. Chinese market offers one of the most lucrative investment avenues owing to the rapid economic progress that it made during the recent past. Etisalat- a UAE based telecom company is planning to make an entry into the Chinese market. Being one of the emerging firms in the world offering telecommunication services, the entry of Etisalat into the Chinese market will mark a new beginning in the history of the firm. However, Chinese market poses different types of risks and offer new and unique opportunities therefore it is necessary that Etisalat must do its homework and assess the situation with the help of different strategic frameworks and models in order to gain significant insight into the Chinese market. This report will attempt to analyse the potential entry of the firm into new market with the help of strategic frameworks and strategies. Etisalat- A general Introduction Etisalat (firm) started its operations in 1976 and primarily served UAE market by providing telecommunication solutions. Over the period of time, however, it became one of the leading telecom services providers in the Middle East Region and expanded its operations in more than 18 countries of Asia, Africa as well as Middle Eastern countries. Serving a total customer base of 94 million, Etisalat is considered as the 13th largest mobile services provider in the world. Such high level of penetration into the market therefore indicates that the firm has the capability and will to expand into new markets to create further value for its shareholders. The majority shareholder is UAE government. (Huawei) Started as a joint venture between the local partners from UAE and Britain’s International Aeradio Limited, Etisalat is now largely owned by the UAE government with 60% shareholding whereas remaining 40% is publically held. It is also because of this reason that Etisalat held the official patronage of being the only firm in UAE allowed to telecommunication services within the country and outside the country. The official support of the firm therefore further increased its strategic depth and capability to undertake large projects with the official support from the government of UAE. In its Middle East, Etisalat serves as an internet hub providing connectivity to other services providers. It is also considered as the largest voice carrier in Africa as well as Middle East and is 12th largest data and voice carrier in the world. Product & Industry Etisalat started as a company offering telecommunication services in Middle East. The range of services included “a one-stop shop for mobile and fixed-line voice and data services to individuals, enterprises and international telecommunications companies, ISPs, content providers and mobile operators.” (Wateen). The line of services offered therefore include voice as well as data services not only to the individuals but services are also aimed at the corproate customers of the firm. However, over the period of time, Etisalat expanded itself into new lines of business and markets wherein it not only offers its core services i.e. telecommunication services, but it is now engaged into other lines of business including training and consultancy, providing technology for call centers, data clearing etc. A 2009 break up of the revenue according to the services indicates that the 53% of the revenue during 2009 has been earned from mobile services, 9% from telephone, 9% from internet, 12% from data services, 6% from interconnect whereas 10% of revenue has been earned from other services. The generic services offered by Etisalat include telephone services, television distribution as well as the data transmission services. The data transmission services mainly include internet services both for home users as well as for institutional users. Telecommunication industry is a technology based industry and offers solutions that range from internet services to high speed voice and data transfer through the sophisticated networks. The progress of the telecommunication industry indicates that the industry passed through high-tech industry to an industry which is attempting to load itself with the value added customer services. Earlier, the industry was only limited to the data transfer and telephone and telex served as the major technological factors that driven the industry to further sophistication. The emergence of internet and information technology however, gave a new boost to the industry and real technological sophistication in the industry started to develop during late 1980s as well as during 1990s. Companies like AT&T and BT were already working in the industry however, the changes in the networking technology brought about a new and more profund change within the industry. This industry, however, became largely concentrated owing to the rapid rise of the technological sophistication as many companies attempted to provide various services such as wireline services, wireless services, cable services as well as satellite services. Firms like Verizone and AT&T developed their own niches in servicing the market according to the different types of services such as wired and wireless services. The demand dynamics of the industry indicate that the demand is mainly driven through innovation and the level of consumer spending. Thus the key drivers for profitability in the market depends upon the overall efficiency with which the service provider operates as well as the level of marketing activity undertaken by the firm. It is therefore also clear that the large firms in the industry dominate because of their easy access to the financial resources that can offer them opportunity to deliver consistenly high performance. Since the industry is high tech therefore the overall capital expenditures are heavy and firms with restricted access to internal as well as external sources of finance may find themselves unable to compete on long term basis. Market & Competition Etisalat operate under the patronage of the UAE government and is probably the only service provider in its primary market i.e. UAE and Middle East. The most important aspect of its success therefore is virtual abscene of competition from its primary markets and continous support of the government and other agencis to expand into new markets. The total market size for Etisalat was relatively small as it initially focused on UAE market and established its monopoly over the market till its monopoly was officially overturned by the UAE government. As such till 2004, Etisalat was holding 100% of the market share in UAE with virtually no close competitor and free reign to accumulate its profits. A five year trend of revenue indicate that the revenue of the firm has consistenly increased however at a decreasing rate. Following grap depict the sales trends of the firm during last five years indicating that the sales has somewhat became stagnant during 2008 and 2009. This may be attributed to the competition not only at the home ground but at the international level also wherein Etisalat has attempted to make an entry. This above graph indicate the change in the revenue for the five years reflecting that the revenue has drastically declined during 2008 and 2009. The decline in the revenue of the firm may be attributed to the intense competition that the firm may be facing due to break up of its monopoly and introduction of new service provider in UAE. Besides some of the new acquisitions by the Etisalat in various countries did not paid off well and as a result the overall revenue declined to a greater extent. (Baltaji) Since the industry is largely technology driven therefore the basis of competition within the industry is mostly based on pricing as well as quality of services. Etisalat, over the period of time, has set its reputation as one of high quality services providers in the region with excellent sales quality. However, after the break up of the monopoly, new players entered into the market and started to directly compete with the firm mostly on the prices. It is also argued that the industry will grow by a CAGR of 8.5% from 2002-2008 with estimated customer base of more than 4 million subscribers in UAE only. (Arab Advisors Group). It was also however, argued that since Etisalat has already acquired a bigger part of the UAE market, it may therefore be relatively difficult for new service provider to compete successfully with the Etisalat. The closest competitor of Etisalat in UAE market is Du- a new company exclusively financed by the Federal government of UAE “with Abu Dhabis Mubadala Development Company and The Emirates Company for Telecommunications & Technology, a new subsidiary of Dubai Technology, e-Commerce & Free Zone Authority (TECOM) with 25 per cent stake each.” (AMEINFO.COM). The only competitor of Etisalat in UAE market therefore is focusing on giving tough times to the firm on the basis of the price competition whereas quality of services is not considered as one of the basis of the competition at least at the home market. However, at international front, the overall competition is tougher as compared to the local markets. Though Etisalat’s entry strategy into new markets is largely based on the fact that it enters only Arab and Muslim dominated countries however, local competition serves as a strong source of competition for Etisalat. For example, its internet services in Pakistan offered through PTCL are getting stiff competition from other cellular and internet services providers which were already in the local market for years. Developments until now Etisalat started as a State sponsored firm however, over the period of time it has been able to establish itself as one of the Fortune 500 companies. This journey has not been easy specially for Etisalat in international market however, its focused strategy and awareness with the local Middle East market allowed it to gain substantial gains into the market. Over the period of time, Etisalat has entered into new markets by making acquisitions in the local market. Till now it has been able to successful acquire and operate firms like Thuraya, offering satellite telephone services, Canar, Sudan, PTCL Pakistan, Etisalat, Egypt, Etisalat Afghanishtan, Etislat India etc. This trend therefore indicates that the Etisalat has mainly focuse on the Muslim and developing countries to expand its business network. This strategy may be considered as successful because these markets were not potentially served by the international services providers such as AT&T and Verizone etc. the presence in the Islamic countries also indicate the deeper roots of the firm in its Muslim legacy and ready acceptability into such markets. Thus Etisalat seems to have taken advantage of the strong anti-western sentiments in Muslim countries to take advantage of the free market space to take first mover advantage. However, despite such expansion, Etisalat’s revenue is declining and the firm is facing stiff competition not only in its home market however, it is also facing the competition in the international market despite its familiarity with the local markets. Considering the above discussion, the decision to enter into Chinese market may be one of the most critical strategic decision that Etisalat may undertake. This is because of the fact that Chinese market is already dominated by the largest telecom services provider in the world and as such gaining an entry into such market will be a risky decision. As such Etisalat must undertake a thorough analysis with the help of various strategic frameworks to understand the market in broader context before deciding on to enter the market. The next part of this report therefore will attempt to discuss some of the most important strategic frameworks to analyze the entry of Etisalat into Chinese market. PESTLE Analysis Political Forces China is a communist country with strong intervention and control of State on the business entities. All three top telecom companies in the country are State owned and Controlled companies with strong support from the government. (The Economist). However, despite Communist orientation of the country, China is opening up itself to the world and political forces in the country are fully creating an environment which is more conducive for the international businesses to flourish. Apart from this, it is also critical to understand that the country’s political environment is relatively stable and does not pose a direct threat to the international businesses. However, it is not out of hand that State may still play greater role in controlling the business environment. Economic Forces Chinese economy is one of the fastest growing economies in the world and almost remained insulated from the current recession that hit most of the developed world. (The Economist). The current issues in the economy are mostly related with the currency depreciation and row between US and China is getting worse as China is being accused of deliberately keeping its currency depreciated in order to make its exports cheaper. During last 30 years the economy of China grew at an average rate of 8% with substantial increase in the standards of life of many. However, economic landscape of the country is still dominated by the State sponsored firms and new and international firms are often forced to work with the local firms in order to benefit the local industry and economy. As such there is always a threat the international players may be forced to work with the local inefficient partners as a part of the economic policy of the country. (Schumpeter). Social Factors China is still a country whose business culture is still deeply rooted into its peculiar social context. Resultantly doing business in China is always difficult because firms have to adjust themselves according to the local social traditions and values. Family values, networking as well as respect for authority are some of the important social variables that need to be taken care of in order to make a successfully entry into the market. Technological factors Telecom Industry is technology driven and with frequent changes in the technology, It sometimes become difficult for the smaller firms to keep pace with this change. China’s technological front in telecom industry is dominated by Huawei and ZTE, two of the large organizations which offer the required hardware support for the firms in telecom industry. Legal Forces Legal environment of the country is relatively complex as new international firms are often legally required to follow complex procedures to make a successfully entry. Regulatory environment also indicate that most of the newcomers have to partner with the local firms and share their expertise and capital in order to raise an enterprises which are formulated with the local and international partners. In a sense, the existing regulations allow entry to the new firms if they can legally form joint ventures with the local firms. It is also critical to note that the government exercise greater control on the internet services and recent row with the Google is one of the glaring examples of how State control the overall flow of contents and traffic on the internet. (MacMillan). It is therefore critical that the Etisalat may have to comply with strict regulatory control over its internet services. Environmental Forces The use of excessive mobile phone services is often considered as damaging for the health of the persons as well as for the environment. The use of second hand and low quality cell phone sets and other telecom material therefore can create significant environmental issues in the future. Till now, however, there are no direct threats for the company as for as the environmental factors are concerned. Industry Life Cycle China is one of the fastest growing countries in the world with growth rates touching as high as 9 to 10%. However, it is also now considered as the second largest market in the world and its home market is really flourishing with the improvement in the economic status of the many. As the economic status of the individuals improves so does their needs for having more luxury therefore China’s needs for telecommunication industry are ever growing. The state of telecom industry in China indicates that the local market is dominated by three State run enterprises offering various services. This was done in order to end the monopoly of any one services provider and create further competition within the market. (The New York Times). China Telecom, China Unicom as well as China Mobile are three recently formed organizations after China undertook the complete reformation of its telecom sector. China Telecom is the largest fixed line services provider in the country as well as one of the leading mobile telecommunication services providers in the country. With increasing penetration into the market and systematic introduction of the new foreign companies in the market, the telecom industry in China is in its growth stage. This therefore indicates that the competition will be tough and given the increasing market and State support to the three local firms, it will become difficult for the new entrants to make a successful and sustainable entry into the market to take advantage of the growing market for mobile services. Porter’s Five Forces Suppliers’ Power The suppliers in this industry are usually giant international firms offering hardware support such as equipments etc. As such there is very little concentration of suppliers at International as well as local level i.e. in Chinese market. Internationally, there are few firms including CISCO, Motorola etc that offer the hardware support whereas in the local market, Huawei and ZTEL seems to dominate the market. However, there is very little power that they can exercise. Barriers to Entry Chinese market is peculiar in the sense that its economy is State dominated and as such most of the players in the industry are supported by the State run institutions with easy access to the external as well as internal finance. Though switching cost in the industry is really low however, due to government policies, there are significant implicit barriers to entry into the market despite the fact that Chinese economy is gradually opening up for the foreign players. Threats of Substitutes Switching cost in the industry is really low and the subscribers often have the advantage to move between the services very easily. Secondly, there is also a strong inclination of buyers to switch between the providers therefore there is also strong price substitution. Overall the threat of substitutes is relatively higher. Buyer Power China is a growing country and as such the overall sensitivity to the price is high. As such the buyers seem to exercise their power in terms of requiring cheaper plans etc. Buyers’ power therefore is also critical because the switching cost is relatively low therefore buyers can easily shift to another service. Thus the overall buyer power is higher too in the industry and with already established monopoly of State run telecom institutions in the country, the overall market space may be tough to acquire, Rivalry between the firms Considering the above factors, it is therefore easier to infer that the overall degree of rivalry between the firms is high in the industry. Low switching cost and low margins therefore make it difficult for the smaller players to compete and as such the overall focus will be on delivering the value through consistent and focused advertising campaigns to gain and maintain a successful entry into the new market. Competition and Internationalization Strategies The above discussion indicates that the level of competition in China will be fierce for Etisalat because it will be directly competing against the firms which are not only bigger in size but work directly under the patronage of the government. Thus Etisalat may not be able to get the first mover advantage in the industry as the industry has already been skimmed through the careful introduction of State owned services such as China Mobile. Secondly, telecom market is also gradually being dominated by the Western companies which are targeting smaller niches in the market in order to consolidate their position. Considering the above, Etisalat therefore needs to carefully tailor its strategies to make an entry into the new market. It may exercise following generic strategies in order to make a successful entry into the market: Focus Strategy- Low Cost In order to get a strong foothold into the Chinese market, Etisalat can enter the market through focus strategy. This focus strategy however, needs to be based on the low cost and as such the overall success of the firm will depend upon how it can offer bundled services at low cost. Offering low cost services will allow the firm to tap that segment of the market which is cost conscious and relatively new to the market. It is believed that the Chinese market is still looking for service providers who can offer cheap services as the existing service providers are considered as expensive especially by the subscribers based in rural areas of the country. Focus- Differentiation Another important strategy that the firm can exercise is the differentiation strategy by offering bundled services to its customers. The telecom services are continuously evolving and many services providers are offering services such as GPS, Live TV etc which clearly distinguish them from other service providers. Etisalat has the capability to offer bundled services through its available resources such that it can offer bundled services such as internet, TV and telephony through one fixed line. This strategy therefore may allow Etisalat to gain an entry into that segment of the market which is looking for the low cost solution to their telephony, TV as well as internet services. Etisalat can enter the Chinese market through formation of joint venture with a local service provider and assist the local provider in offering niche services which local partners do not provide to their subscribers. Conclusion and Future outlook Chinese market is one of the lucrative markets in the world however, to make a successful entry into this market, it is really critical that Etisalat must develop very careful focus strategy of either offering its services at low cost or create the strong differentiation. Future outlook indicates that the firm may face significant challenges in the Chinese market because in the presence of State owned enterprises, it will be difficult for the firm to get a sustainable entry into the market. Bibliography 1. AMEINFO.COM. "New UAE telcoms operator pledges competition to Etisalat on all services - and on price." 2006. AMEINFO.COM. 8 April 2010 . 2. Arab Advisors Group. "Where will UAEs Etisalat face competition in 2005?" 6th July 2004. Arab Advisors. 08 April 2010 . 3. Baltaji, Dana El. "Abu Dhabi Stocks Fall to Two-Week Low, Led by Etisalat, Aldar." 05 April 2010. Business Week. 9 April 2010 . 4. Huawei. "Leading in UAE ." 2010. Huawei. 10 April 2010 . 5. MacMillan, Douglas. "Googles Quixotic China Challenge." 25 March 2010. Business Week. 10 April 2010 . 6. Schumpeter. "The panda has two faces." 31 March 2010. The Economist. 9 April 2010 . 7. The Economist. "Capitalism in China." 21 Jan 2010. The Economist. 10 April 2010 . 8. —. "The world’s big economies were all hit by the recession. Now the field is spreading." 21 Jan 2010. The Economist. 10 April 2010 . 9. The New York Times. "Chinas telecom industry revamp gets under way." 2008. The New York Times. 9 April 2010 . 10. Wateen. "Corporate Profile." 2010. Wateen. 08 April 2010 . Appendix Revenue Trends 2005 2006 2007 2008 2009 12866 16290 21340 29360 30831   26.61% 31.00% 37.58% 5.01% Read More